Sebi writes to Jet Airways, raising objections over parts of its agreement with Etihad

MUMBAI: The Securities and Exchange Board of India (Sebi) has written to Jet Airways, raising questions over parts of the agreement signed by the Indian carrier with Etihad Airways last month as they appear to confer substantial management rights to the Middle-Eastern airline. Sebi's concerns might lead to a reworking of the over Rs 2,000-crore deal to secure regulatory approval.

In a recent communication to Jet Airways, the regulator expressed reservations regarding the shareholders' agreement entered into by the two partners that gives Etihad the right to nominate three directors on the board of the Indian carrier and to decide senior management positions. The letter, sent earlier this month, was described to ET by people familiar with its content. The essential point of the letter is that Jet Airways has to convince the regulator that Etihad's rights do not amount to joint control alongside promoter Naresh Goyal.

Shortly after announcing the strategic alliance with the Abu Dhabi-based airline on April 24, Jet Airways had said there would not be any change in control. A statement issued by the company said Goyal would continue to hold a 51% stake in the company.

A person with direct knowledge of the developments said Sebi will vet key documents, including the shareholders' agreement, to ascertain if there are clauses or provisions that indicate the acquirer or the foreign partner is in a position to influence or control key management policies or operations. The person declined to be named given the sensitivity of the case.

If the regulator is not satisfied with Jet's response, it can even direct the company to rework certain provisions of the shareholders' agreement with Etihad to ensure it conforms to both the letter and spirit of the regulations.

Jet did not respond to requests on email or phone calls seeking comments on these issues.


"If Sebi believes that some of these clauses amount to Etihad having control, those clauses may have to be rewritten or renegotiated... as long as it doesn't disturb the commercial agreement between the parties," said a senior lawyer with a leading law firm.

Jet had signed an agreement with Etihad to sell a 24% stake through a preferential offer.

Jet to Seek Shareholders' Nod at EGM Tomorrow

The proposed offer capped the shareholding at 24%, which precluded the need to make an open offer to other shareholders. According to investment bankers, the deal was structured in such a way that it conformed to both the rules governing foreign investment in the aviation sector and Sebi norms on takeovers or acquisition of shares in companies. Foreign holding in Indian carriers is capped at 49%.

Sebi 's worries may stem from the fact that it has to be seen to be consistent in interpreting control in mergers and acquisitions. The regulator has been of the view that the definition of what constitutes control of a company should be uniform and applied consistently, although this may not be easy given varying scenarios.

In a case relating to the issue of control of a company called Shubkam Ventures, the Securities Appellate tribunal (SAT), had said veto rights were not tantamount to control. The regulator then challenged this in the Supreme Court, which said the SAT ruling will not be binding and left the question of law on control open. "If the acquirer has rights to appoint senior officials through which they can control operations, it is in a way negative control," said a senior investment banker who did not want to be named.